Self-Regulatory Organizations; National Securities Clearing Corporation; Notice of No Objection To Advance Notice To Enhance the Calculation of the Family-Issued Securities Charge, 17929-17932 [2020-06598]

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Federal Register / Vol. 85, No. 62 / Tuesday, March 31, 2020 / Notices
Who?
Monthly Customer-Specific Reporting (upon request):
Self-routing broker-dealers .....
Broker-dealers that outsource
routing (white-labeling).
What?
Current requirement
Exemption
Detailed customer-specific order
handling disclosures for NMS
stock orders submitted on a not
held basis.
.......................................................
Data collection began Jan. 1,
2020; first report (covering January) was due Feb. 25, 2020.
None.
Data collection begins Apr. 1,
2020; first report (covering
April) due May 27, 2020.
Data collection begins June 1,
2020; first report (covering
June) due July 29, 2020 for
customer requests made on or
before July 17.
* This requires disclosure of material aspects of broker-dealer’s relationship with routing venues, which includes the details of any arrangement
with a venue where the level of execution quality is negotiated for an increase or decrease in payment for order flow. See Adopting Release at
58376, n. 397.
Accordingly, it is ordered, pursuant to
Rule 606(c) of Regulation NMS under
the Exchange Act,14 that:
(1) Broker-dealers are exempt from the
requirement to provide the public report
of held order data for the first quarter of
2020 required by Rule 606(a) until May
29, 2020.
(2) Broker-dealers engaged in
outsourced routing activity are exempt
from the requirement to start collecting
the Rule 606(b)(3) data until June 1,
2020 for such activity. For customer
requests that are made on or before July
17, 2020, a broker-dealer is exempt from
the requirement to provide a Rule
606(b)(3) report for outsourced routing
activity covering June 2020 data until
July 29, 2020.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.15
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–06621 Filed 3–30–20; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–88476; File No. SR–
PEARL–2020–03]
Self-Regulatory Organizations; MIAX
PEARL, LLC; Notice of Designation of
Longer Period for Commission Action
on Proposed Rule Change To Adopt
Rules Governing the Trading of Equity
Securities
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March 25, 2020.
On January 24, 2020, MIAX PEARL,
LLC (‘‘MIAX PEARL’’ or ‘‘Exchange’’)
filed with the Securities and Exchange
Commission (‘‘Commission’’), pursuant
to Section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Act’’),1 and
Rule 19b–4 thereunder,2 a proposed rule
change to adopt rules governing the
trading of equity securities. The
proposed rule change was published for
comment in the Federal Register on
February 12, 2020.3 The Commission
has received no comment letters on the
proposed rule change.
Section 19(b)(2) of the Act 4 provides
that within 45 days of the publication of
notice of the filing of a proposed rule
change, or within such longer period up
to 90 days as the Commission may
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding or as to which the
self-regulatory organization consents,
the Commission shall either approve the
proposed rule change, disapprove the
proposed rule change, or institute
proceedings to determine whether the
proposed rule change should be
disapproved. The 45th day for this filing
is March 28, 2020.
The Commission is extending the 45day time period for Commission action
on the proposed rule change. The
Commission finds that it is appropriate
to designate a longer period within
which to take action on the proposed
rule change so that it has sufficient time
to consider the proposed rule change.
Accordingly, pursuant to Section
19(b)(2)(A)(ii)(I) of the Act 5 and for the
reasons stated above, the Commission
designates May 12, 2020, as the date by
which the Commission shall either
approve, disapprove, or institute
proceedings to determine whether to
disapprove, the proposed rule change
(File No. SR–PEARL–2020–03).
CFR 242.606(c).
CFR 200.30–3(a)(69).
1 15 U.S.C. 78s(b)(1).
15 17
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[FR Doc. 2020–06610 Filed 3–30–20; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–88469; File No. SR–NSCC–
2020–801]
Self-Regulatory Organizations;
National Securities Clearing
Corporation; Notice of No Objection To
Advance Notice To Enhance the
Calculation of the Family-Issued
Securities Charge
March 25, 2020.
On January 28, 2020, National
Securities Clearing Corporation
(‘‘NSCC’’) filed with the Securities and
Exchange Commission (‘‘Commission’’)
advance notice SR–NSCC–2020–801
(‘‘Advance Notice’’) pursuant to Section
806(e)(1) of Title VIII of the Dodd-Frank
Wall Street Reform and Consumer
Protection Act, entitled Payment,
Clearing and Settlement Supervision
Act of 2010 (‘‘Clearing Supervision
Act’’) 1 and Rule 19b–4(n)(1)(i) 2 under
the Securities Exchange Act of 1934
(‘‘Exchange Act’’) 3 to amend the
calculation of NSCC’s existing margin
charge applied to long positions in
Family-Issued Securities 4 to address
certain risk presented by these
positions. The Advance Notice was
published for public comment in the
6 17
CFR 200.30–3(a)(31).
U.S.C. 5465(e)(1).
2 17 CFR 240.19b–4(n)(1)(i).
3 15 U.S.C. 78a et seq.
4 Terms not defined herein are defined in NSCC’s
Rules and Procedures (‘‘Rules’’), available at http://
www.dtcc.com/∼/media/Files/Downloads/legal/
rules/nscc_rules.pdf.
1 12
2 17
CFR 240.19b–4.
Securities Exchange Act Release No. 88132
(February 6, 2020), 85 FR 8053.
4 15 U.S.C. 78s(b)(2).
5 15 U.S.C. 78s(b)(2)(A)(ii)(I).
3 See
14 17
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.6
J. Matthew DeLesDernier,
Assistant Secretary.
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Federal Register / Vol. 85, No. 62 / Tuesday, March 31, 2020 / Notices
Federal Register on February 27, 2020,5
and the Commission has received no
comments regarding the changes
proposed in the Advance Notice.6 This
publication serves as notice of no
objection to the Advance Notice.
I. The Advance Notice
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A. Background
NSCC provides clearing, settlement,
risk management, central counterparty
services, and a guarantee of completion
for virtually all broker-to-broker trades
involving equity securities, corporate
and municipal debt securities, and
certain other securities. NSCC manages
its credit exposure to its Members by
determining an appropriate Required
Fund Deposit for each Member, which
serves as each Member’s margin.7 The
aggregate of all NSCC Members’
Required Fund Deposits (together with
certain other deposits required under
the Rules) constitutes NSCC’s Clearing
Fund, which NSCC would access
should a Member default and that
Member’s Required Fund Deposit, upon
liquidation, is insufficient to satisfy
NSCC’s losses.
Each Member’s Required Fund
Deposit consists of a number of
applicable components, each of which
is calculated to address specific risks
faced by NSCC.8 NSCC states that it
regularly assesses the market, liquidity,
and other risks that its margining
methodologies are designed to mitigate
to evaluate whether margin levels are
commensurate with the particular risk
attributes of each relevant product,
portfolio, and market.9 Such risks
include risks introduced by its
5 Securities Exchange Act Release No. 88267 (Feb.
24, 2020), 85 FR 11437 (Feb. 27, 2020) (SR–NSCC–
2020–801) (‘‘Notice of Filing’’). On January 28,
2020, NSCC also filed a related proposed rule
change (SR–NSCC–2020–002) with the Commission
pursuant to Section 19(b)(1) of the Exchange Act
and Rule 19b–4 thereunder (‘‘Proposed Rule
Change’’). 15 U.S.C. 78s(b)(1) and 17 CFR 240.19b–
4, respectively. In the Proposed Rule Change, which
was published in the Federal Register on February
18, 2020, NSCC seeks approval of proposed changes
to its rules necessary to implement the Advance
Notice. Securities Exchange Act Release No. 88163
(Feb. 11, 2020), 85 FR 8964 (Feb. 18, 2020). The
comment period for the related Proposed Rule
Change filing closed on March 10, 2020.
6 Since the proposal contained in the Advance
Notice was also filed as a proposed rule change, all
public comments received on the proposal are
considered regardless of whether the comments are
submitted on the Proposed Rule Change or the
Advance Notice.
7 Terms not defined herein are defined in NSCC’s
Rules and Procedures (‘‘Rules’’), available at http://
www.dtcc.com/∼/media/Files/Downloads/legal/
rules/nscc_rules.pdf. See Rule 4 (Clearing Fund)
and Procedure XV (Clearing Fund Formula and
Other Matters) of the Rules.
8 Id.
9 See Notice of Filing supra note 5, at 85 FR
11437.
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counterparties or Members. In
particular, NSCC seeks to identify and
mitigate its exposures to specific wrongway risk (‘‘SWWR’’), which is the risk
that an exposure to a counterparty is
highly likely to increase when the
creditworthiness of that counterparty
deteriorates. Such risk would arise
when NSCC acts as central counterparty
to a Member with unsettled long
positions in securities that were issued
by a Member or an affiliate of that
Member (‘‘Family-Issued Securities’’). If
that Member defaults, NSCC would seek
to cover its losses by closing out the
unsettled Family-Issued Securities long
positions. However, because the
Member default would also likely lead
to a drop in the creditworthiness of the
Member and, therefore, the value of the
Family-Issued Securities, NSCC would
likely not be able to completely cover its
losses in closing out those positions.
In order to address this particular
form of SWWR, NSCC imposes a charge
on all Members with unsettled long
positions in their own Family-Issued
Securities, called the FIS Charge, which
is calculated by multiplying the value of
the net unsettled long positions in
Family-Issued Securities by a certain
percentage (‘‘Haircut Rate’’). Currently,
the Haircut Rate applied in the FIS
Charge calculation is based on a
Member’s rating category on NSCC’s
Credit Risk Rating Matrix (‘‘CRRM’’),
which ranges from 1 to 7. NSCC utilizes
the CRRM to evaluate its credit risk
exposure to each Member; a higher
CRRM rating represents a higher credit
risk (i.e., a greater risk of defaulting on
settlement obligations) and may cause a
Member to be subject to enhanced
surveillance or additional margin
requirements.10
Currently, the applicable Haircut Rate
for the FIS Charge depends on a
Member’s rating on the CRRM.
Specifically, for Members that are rated
6 or 7 on the CRRM, the applicable
Haircut Rate for net unsettled long
positions in Family-Issued Securities
shall be (1) at least 80 percent for fixed
income securities, and (2) 100 percent
for equity securities. For Members that
are rated 1 through 5 on the CRRM, the
applicable Haircut Rate shall be (1) at
least 40 percent for fixed income
10 See Rule 1 and Section 4 of Rule 2B of the
Rules, supra note 8. See also Securities Exchange
Act Release Nos. 80734 (May 19, 2017), 82 FR
24177 (May 25, 2017) (SR–DTC–2017–002, SR–
FICC–2017–006, SR–NSCC–2017–002); and 80731
(May 19, 2017), 82 FR 24174 (May 25, 2017) (SR–
DTC–2017–801, SR–FICC–2017–804, SR–NSCC–
2017–801).
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securities, and (2) at least 50 percent for
equity securities.11
B. Proposed Changes to FIS Charge
In the Advance Notice, NSCC is
proposing to revise the calculation of
the FIS Charge to use the same Haircut
Rate for all Members regardless of their
CRRM rating category. Under the
proposal, net unsettled long positions in
(1) fixed income securities that are
Family-Issued Securities are charged a
Haircut Rate of no less than 80 percent,
and (2) equity securities that are FamilyIssued Securities are charged a Haircut
Rate of 100 percent.
NSCC states that it may still be
exposed to SWWR despite applying
different Haircut Rates based on a
Member’s rating on the CRRM, and it
can better mitigate its exposure to this
risk by calculating the FIS Charge
without considering Members’ CRRM
rating categories.12 According to NSCC,
while the current methodology
appropriately assumes that Members
with a higher rating category on the
CRRM present a heightened credit risk
to NSCC or have demonstrated higher
risk related to their ability to meet
settlement, this methodology does not
account for the risk that a Member may
default due to unanticipated causes
(referred to as a ‘‘jump-to-default’’
scenario) not captured by the CRRM.13
This is because the CRRM relies on
historical data as a predictor of future
risks,14 whereas jump-to-default
scenarios are triggered by unanticipated
causes that could not be predicted based
on historical trends or data (e.g.,
instances of fraud or other bad actions
by a Member’s management). Therefore,
NSCC represents that the proposed
change is designed to cover SWWR
arising from potential jump-to-default
scenarios by applying the higher
applicable Haircut Rate in calculating
the FIS Charge for all Members.15
The practical outcome of this
proposed change is that for all Family
Issued Securities, NSCC would apply a
haircut equivalent to the current Haircut
Rate for Members that are rated 6 or 7
on the CRRM regardless of whether a
Member is rated at a 6 or 7. To
implement this proposal, NSCC would
amend Sections I.(A)(1)(a)(iv) and
I.(A)(2)(a)(iv) of Procedure XV of the
Rules.
11 See Procedure XV (Clearing Fund Formula and
Other Matters) of the Rules, supra note 7.
12 See Notice of Filing supra note 5, at 85 FR
11438.
13 See id.
14 See id.
15 See id.
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II. Discussion and Commission
Findings
Although the Clearing Supervision
Act does not specify a standard of
review for an advance notice, the stated
purpose of the Clearing Supervision Act
is instructive: to mitigate systemic risk
in the financial system and promote
financial stability by, among other
things, promoting uniform risk
management standards for SIFMUs and
strengthening the liquidity of SIFMUs.16
Section 805(a)(2) of the Clearing
Supervision Act authorizes the
Commission to prescribe regulations
containing risk management standards
for the payment, clearing, and
settlement activities of designated
clearing entities engaged in designated
activities for which the Commission is
the supervisory agency.17 Section 805(b)
of the Clearing Supervision Act
provides the following objectives and
principles for the Commission’s risk
management standards prescribed under
Section 805(a):18
• To promote robust risk
management;
• to promote safety and soundness;
• to reduce systemic risks; and
• to support the stability of the
broader financial system.
Section 805(c) provides, in addition,
that the Commission’s risk management
standards may address such areas as
risk management and default policies
and procedures, among others areas.19
The Commission has adopted risk
management standards under Section
805(a)(2) of the Clearing Supervision
Act and Section 17A of the Exchange
Act (the ‘‘Clearing Agency Rules’’).20
The Clearing Agency Rules require,
among other things, each covered
clearing agency to establish, implement,
maintain, and enforce written policies
and procedures that are reasonably
designed to meet certain minimum
requirements for its operations and risk
management practices on an ongoing
basis.21 As such, it is appropriate for the
Commission to review advance notices
against the Clearing Agency Rules and
the objectives and principles of these
risk management standards as described
in Section 805(b) of the Clearing
16 See
12 U.S.C. 5461(b).
U.S.C. 5464(a)(2).
18 12 U.S.C. 5464(b).
19 12 U.S.C. 5464(c).
20 17 CFR 240.17Ad-22. See Securities Exchange
Act Release No. 68080 (October 22, 2012), 77 FR
66220 (November 2, 2012) (S7–08–11). See also
Securities Exchange Act Release No. 78961
(September 28, 2016), 81 FR 70786 (October 13,
2016) (S7–03–14) (‘‘Covered Clearing Agency
Standards’’). NSCC is a ‘‘covered clearing agency’’
as defined in Rule 17Ad–22(a)(5).
21 Id.
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Supervision Act. As discussed below,
the Commission believes the proposal in
the Advance Notice is consistent with
the objectives and principles described
in Section 805(b) of the Clearing
Supervision Act,22 and in Rules 17Ad–
22(e)(4)(i) 23 and (e)(6)(i) and (v) 24 of the
Clearing Agency Rules.
A. Consistency With Section 805(b) of
the Clearing Supervision Act
For the reasons discussed
immediately below, the Commission
believes that the Advance Notice is
consistent with the stated objectives and
principles of Section 805(b) of the
Clearing Supervision Act.25
Specifically, as discussed below, the
Commission believes that the changes
proposed in the Advance Notice are
consistent with promoting robust risk
management, promoting safety and
soundness, reducing systemic risks, and
supporting the broader financial
system.26
First, the Commission believes that
the proposal is consistent with
promoting robust risk management.
NSCC faces SWWR when it acts as
central counterparty to a Member with
long positions in FIS. Although NSCC’s
current margin methodology addresses
SWWR through imposition of the FIS
Charge, it does not address SWWR
associated with a jump-to-default
scenario. As described above, the
proposal would address SWWR
associated with a jump-to-default
scenario by using the higher applicable
Haircut Rate for all Members concerning
their net unsettled long positions in
Family-Issued Securities, regardless of
the Members’ CRRM rating category. As
such, the proposal would address a risk
not captured currently under NSCC’s
margin methodology and provide for
more comprehensive risk management
of NSCC’s risks, consistent with the
promotion of robust risk management.
Second, the Commission believes that
the proposal is consistent with the
promotion of safety and soundness at
NSCC. The collection of additional
margin, by applying the higher
applicable Haircut Rate in calculating
the FIS Charge for all Members, would
better enable NSCC to manage the
potential losses arising out of a Member
default. Holding additional resources to
address such losses would promote
NSCC’s safety and soundness.
Finally, the Commission believes that
the proposal is consistent with reducing
22 12
U.S.C. 5464(b).
CFR 240.17Ad–22(e)(4)(i).
24 17 CFR 240.17Ad–22(e)(6)(i) and (v).
25 12 U.S.C. 5464(a)(2) and (b).
26 12 U.S.C. 5464(b).
23 17
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17931
systemic risk and supporting the
broader financial system. As discussed
above, NSCC proposes to collect
additional margin to collateralize
exposures to SWWR associated with a
jump-to-default scenario, which could
reduce the probability that NSCC would
mutualize a loss stemming from the
close-out of a defaulted Member with
net unsettled long positions in FamilyIssued Securities. While unavoidable
under certain circumstances, reducing
the probability of loss mutualization
during periods of market stress could
lessen the transmission of financial risks
arising from a Member default to nondefaulting Members, their customers,
and the broader market. Further, NSCC
maintaining additional margin could
further reduce the potential that NSCC
would need to call for additional
resources from Members in times of
market stress. The Commission believes,
therefore, that the proposal would be
consistent with reducing systemic risk
and supporting the stability of the
broader financial system. Accordingly,
and for the reasons stated above, the
Commission believes the changes
proposed in the Advance Notice are
consistent with Section 805(b) of the
Clearing Supervision Act.
B. Consistency With Rule 17Ad–
22(e)(4)(i)
Rule 17Ad–22(e)(4)(i) under the Act
requires that each covered clearing
agency establish, implement, maintain
and enforce written policies and
procedures reasonably designed to
effectively identify, measure, monitor,
and manage its credit exposures to
participants and those arising from its
payment, clearing, and settlement
processes, including by maintaining
sufficient financial resources to cover its
credit exposure to each participant fully
with a high degree of confidence.27
As described above, NSCC is exposed
to SWWR where it acts as central
counterparty for its Members’
transactions in Family-Issued Securities.
Applying the same higher Haircut Rate
to all Members with net long unsettled
positions in Family-Issued Securities,
regardless of their rating on the CRRM,
would help further mitigate NSCC’s
SWWR exposures, especially in a jumpto-default scenario. Therefore, applying
the same Haircut Rate in the FIS charge
calculation is designed to help NSCC
collect sufficient financial resources to
help cover its credit exposures, with a
high degree of confidence, to those
Members seeking to clear and settle
transactions in Family-Issued Securities.
Therefore, the Commission believes the
27 17
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CFR 240.17Ad–22(e)(4)(i).
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proposed change is consistent with Rule
17Ad–22(e)(4)(i).28
C. Consistency With Rule 17Ad–
22(e)(6)(i) and (v)
Rule 17Ad–22(e)(6)(i) under the Act
requires that each covered clearing
agency that provides central
counterparty services establish,
implement, maintain and enforce
written policies and procedures
reasonably designed to cover its credit
exposures to its participants by
establishing a risk-based margin system
that, at a minimum, considers, and
produces margin levels commensurate
with, the risks and particular attributes
of each relevant product, portfolio, and
market.29 Rule 17Ad–22(e)(6)(v) under
the Act requires that each covered
clearing agency that provides central
counterparty services establish,
implement, maintain and enforce
written policies and procedures
reasonably designed to cover its credit
exposures to its participants by
establishing a risk-based margin system
that, at a minimum, uses an appropriate
method for measuring credit exposure
that accounts for relevant product risk
factors and portfolio effects across
products.30
As described above, NSCC faces
SWWR in jump-to-default scenarios
where it acts as central counterparty to
Member transactions in Family-Issued
Securities. This risk is present
regardless of a Member’s rating on the
CRRM. However, the current
methodology assumes that Members
with a higher rating on the CRRM
present a heightened credit risk to NSCC
and applies a higher Haircut Rate to
such Members. This distinction does
not take into account the SWWR that
would manifest in a jump-to-default
scenario. As such, NSCC proposes to
apply the same higher Haircut Rate to
all Members. This proposal would
improve NSCC’s ability to mitigate its
exposure to SWWR in a jump-to-default
scenario, thereby helping NSCC to
maintain a risk-based margin system
that considers, and produces margin
levels commensurate with, the risks and
particular attributes of net unsettled
long positions in Family-Issued
Securities. Therefore, the Commission
believes that the proposal would be
consistent with Rule 17Ad–22(e)(6)(i).31
Additionally, because the enhanced
FIS Charge would be a component of the
margin that NSCC collects from its
Members to help cover NSCC credit
exposure to the Members, and because
the charge would be based on different
product risk factors with respect to
equity and fixed-income securities, it
would be part of an appropriate method
for measuring credit exposure that
accounts for relevant product risk
factors and portfolio effects across
products, as described above. Therefore,
the Commission believes the proposed
change is consistent with Rule 17Ad–
22(e)(6)(v).32
III. Conclusion
It is therefore noticed, pursuant to
Section 806(e)(1)(I) of the Clearing
Supervision Act, that the Commission
does not object to Advance Notice (SR–
NSCC–2020–801) and that NSCC is
authorized to implement the proposal as
of the date of this notice or the date of
an order by the Commission approving
proposed rule change SR–NSCC–2020–
002, whichever is later.
By the Commission.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–06598 Filed 3–30–20; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–88473; File No. SR–Phlx–
92020–14]
Self-Regulatory Organizations; Nasdaq
PHLX LLC; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Amend Options 3,
Section 8, Openings in Options
March 25, 2020.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b-4 thereunder,2
notice is hereby given that on March 24,
2020, Nasdaq PHLX LLC (‘‘Phlx’’ or
‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by the Exchange. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend
Phlx Rules at Options 3, Section 8, titled
‘‘Openings in Options.’’
28 Id.
29 17
32 17
30 17
CFR 240.17Ad–22(e)(6)(i).
CFR 240.17Ad–22(e)(6)(v).
31 17 CFR 240.17Ad–22(e)(6)(i).
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CFR 240.17Ad–22(e)(6)(v).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
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The text of the proposed rule change
is available on the Exchange’s website at
http://nasdaqphlx.cchwallstreet.com/,
at the principal office of the Exchange,
and at the Commission’s Public
Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to amend
Phlx Rules at Options 3, Section 8, titled
‘‘Openings in Options.’’ The Exchange
proposes to rename this rule ‘‘Options
Opening Process.’’ Specifically, the
Exchange is proposing to amend the
definition of ‘‘market for the underlying
security’’ within Options 3, Section
8(a)(ii).
Today Options 3, Section 8(a)(ii)
describes ‘‘market for the underlying
security’’ as ‘‘. . .either the primary
listing market or the primary volume
market (defined as the market with the
most liquidity in that underlying
security for the previous two calendar
months), as determined by the Exchange
by underlying and announced to the
membership on the Exchange’s
website.’’
The Exchange proposes to amend this
definition by replacing the term
‘‘primary volume market’’ with ‘‘an
alternative market designated by the
primary market.’’ The Exchange
anticipates that an alternative market
would be necessary if the primary
listing market were impaired.3 In the
event that a primary market is impaired
and utilizes its designated alternative
market, the Exchange would utilize that
market as the underlying.4 The
3 The Exchange notes that the primary listing
market and the primary volume market as defined
in Phlx’s Rules could be the same market and
therefore an alternative market is not available
under the current Rule.
4 For example, in the event that the New York
Stock Exchange LLC was unable to open because of
an issue with its market and it designated NYSE
E:\FR\FM\31MRN1.SGM
31MRN1

Agencies

[Federal Register Volume 85, Number 62 (Tuesday, March 31, 2020)]
[Notices]
[Pages 17929-17932]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-06598]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-88469; File No. SR-NSCC-2020-801]
Self-Regulatory Organizations; National Securities Clearing
Corporation; Notice of No Objection To Advance Notice To Enhance the
Calculation of the Family-Issued Securities Charge
March 25, 2020.
On January 28, 2020, National Securities Clearing Corporation
(``NSCC'') filed with the Securities and Exchange Commission
(``Commission'') advance notice SR-NSCC-2020-801 (``Advance Notice'')
pursuant to Section 806(e)(1) of Title VIII of the Dodd-Frank Wall
Street Reform and Consumer Protection Act, entitled Payment, Clearing
and Settlement Supervision Act of 2010 (``Clearing Supervision Act'')
\1\ and Rule 19b-4(n)(1)(i) \2\ under the Securities Exchange Act of
1934 (``Exchange Act'') \3\ to amend the calculation of NSCC's existing
margin charge applied to long positions in Family-Issued Securities \4\
to address certain risk presented by these positions. The Advance
Notice was published for public comment in the
[[Page 17930]]
Federal Register on February 27, 2020,\5\ and the Commission has
received no comments regarding the changes proposed in the Advance
Notice.\6\ This publication serves as notice of no objection to the
Advance Notice.
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\1\ 12 U.S.C. 5465(e)(1).
\2\ 17 CFR 240.19b-4(n)(1)(i).
\3\ 15 U.S.C. 78a et seq.
\4\ Terms not defined herein are defined in NSCC's Rules and
Procedures (``Rules''), available at http://www.dtcc.com/~/media/
Files/Downloads/legal/rules/nscc_rules.pdf.
\5\ Securities Exchange Act Release No. 88267 (Feb. 24, 2020),
85 FR 11437 (Feb. 27, 2020) (SR-NSCC-2020-801) (``Notice of
Filing''). On January 28, 2020, NSCC also filed a related proposed
rule change (SR-NSCC-2020-002) with the Commission pursuant to
Section 19(b)(1) of the Exchange Act and Rule 19b-4 thereunder
(``Proposed Rule Change''). 15 U.S.C. 78s(b)(1) and 17 CFR 240.19b-
4, respectively. In the Proposed Rule Change, which was published in
the Federal Register on February 18, 2020, NSCC seeks approval of
proposed changes to its rules necessary to implement the Advance
Notice. Securities Exchange Act Release No. 88163 (Feb. 11, 2020),
85 FR 8964 (Feb. 18, 2020). The comment period for the related
Proposed Rule Change filing closed on March 10, 2020.
\6\ Since the proposal contained in the Advance Notice was also
filed as a proposed rule change, all public comments received on the
proposal are considered regardless of whether the comments are
submitted on the Proposed Rule Change or the Advance Notice.
---------------------------------------------------------------------------
I. The Advance Notice
A. Background
NSCC provides clearing, settlement, risk management, central
counterparty services, and a guarantee of completion for virtually all
broker-to-broker trades involving equity securities, corporate and
municipal debt securities, and certain other securities. NSCC manages
its credit exposure to its Members by determining an appropriate
Required Fund Deposit for each Member, which serves as each Member's
margin.\7\ The aggregate of all NSCC Members' Required Fund Deposits
(together with certain other deposits required under the Rules)
constitutes NSCC's Clearing Fund, which NSCC would access should a
Member default and that Member's Required Fund Deposit, upon
liquidation, is insufficient to satisfy NSCC's losses.
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\7\ Terms not defined herein are defined in NSCC's Rules and
Procedures (``Rules''), available at http://www.dtcc.com/~/media/
Files/Downloads/legal/rules/nscc_rules.pdf. See Rule 4 (Clearing
Fund) and Procedure XV (Clearing Fund Formula and Other Matters) of
the Rules.
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Each Member's Required Fund Deposit consists of a number of
applicable components, each of which is calculated to address specific
risks faced by NSCC.\8\ NSCC states that it regularly assesses the
market, liquidity, and other risks that its margining methodologies are
designed to mitigate to evaluate whether margin levels are commensurate
with the particular risk attributes of each relevant product,
portfolio, and market.\9\ Such risks include risks introduced by its
counterparties or Members. In particular, NSCC seeks to identify and
mitigate its exposures to specific wrong-way risk (``SWWR''), which is
the risk that an exposure to a counterparty is highly likely to
increase when the creditworthiness of that counterparty deteriorates.
Such risk would arise when NSCC acts as central counterparty to a
Member with unsettled long positions in securities that were issued by
a Member or an affiliate of that Member (``Family-Issued Securities'').
If that Member defaults, NSCC would seek to cover its losses by closing
out the unsettled Family-Issued Securities long positions. However,
because the Member default would also likely lead to a drop in the
creditworthiness of the Member and, therefore, the value of the Family-
Issued Securities, NSCC would likely not be able to completely cover
its losses in closing out those positions.
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\8\ Id.
\9\ See Notice of Filing supra note 5, at 85 FR 11437.
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In order to address this particular form of SWWR, NSCC imposes a
charge on all Members with unsettled long positions in their own
Family-Issued Securities, called the FIS Charge, which is calculated by
multiplying the value of the net unsettled long positions in Family-
Issued Securities by a certain percentage (``Haircut Rate'').
Currently, the Haircut Rate applied in the FIS Charge calculation is
based on a Member's rating category on NSCC's Credit Risk Rating Matrix
(``CRRM''), which ranges from 1 to 7. NSCC utilizes the CRRM to
evaluate its credit risk exposure to each Member; a higher CRRM rating
represents a higher credit risk (i.e., a greater risk of defaulting on
settlement obligations) and may cause a Member to be subject to
enhanced surveillance or additional margin requirements.\10\
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\10\ See Rule 1 and Section 4 of Rule 2B of the Rules, supra
note 8. See also Securities Exchange Act Release Nos. 80734 (May 19,
2017), 82 FR 24177 (May 25, 2017) (SR-DTC-2017-002, SR-FICC-2017-
006, SR-NSCC-2017-002); and 80731 (May 19, 2017), 82 FR 24174 (May
25, 2017) (SR-DTC-2017-801, SR-FICC-2017-804, SR-NSCC-2017-801).
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Currently, the applicable Haircut Rate for the FIS Charge depends
on a Member's rating on the CRRM. Specifically, for Members that are
rated 6 or 7 on the CRRM, the applicable Haircut Rate for net unsettled
long positions in Family-Issued Securities shall be (1) at least 80
percent for fixed income securities, and (2) 100 percent for equity
securities. For Members that are rated 1 through 5 on the CRRM, the
applicable Haircut Rate shall be (1) at least 40 percent for fixed
income securities, and (2) at least 50 percent for equity
securities.\11\
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\11\ See Procedure XV (Clearing Fund Formula and Other Matters)
of the Rules, supra note 7.
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B. Proposed Changes to FIS Charge
In the Advance Notice, NSCC is proposing to revise the calculation
of the FIS Charge to use the same Haircut Rate for all Members
regardless of their CRRM rating category. Under the proposal, net
unsettled long positions in (1) fixed income securities that are
Family-Issued Securities are charged a Haircut Rate of no less than 80
percent, and (2) equity securities that are Family-Issued Securities
are charged a Haircut Rate of 100 percent.
NSCC states that it may still be exposed to SWWR despite applying
different Haircut Rates based on a Member's rating on the CRRM, and it
can better mitigate its exposure to this risk by calculating the FIS
Charge without considering Members' CRRM rating categories.\12\
According to NSCC, while the current methodology appropriately assumes
that Members with a higher rating category on the CRRM present a
heightened credit risk to NSCC or have demonstrated higher risk related
to their ability to meet settlement, this methodology does not account
for the risk that a Member may default due to unanticipated causes
(referred to as a ``jump-to-default'' scenario) not captured by the
CRRM.\13\ This is because the CRRM relies on historical data as a
predictor of future risks,\14\ whereas jump-to-default scenarios are
triggered by unanticipated causes that could not be predicted based on
historical trends or data (e.g., instances of fraud or other bad
actions by a Member's management). Therefore, NSCC represents that the
proposed change is designed to cover SWWR arising from potential jump-
to-default scenarios by applying the higher applicable Haircut Rate in
calculating the FIS Charge for all Members.\15\
---------------------------------------------------------------------------
\12\ See Notice of Filing supra note 5, at 85 FR 11438.
\13\ See id.
\14\ See id.
\15\ See id.
---------------------------------------------------------------------------
The practical outcome of this proposed change is that for all
Family Issued Securities, NSCC would apply a haircut equivalent to the
current Haircut Rate for Members that are rated 6 or 7 on the CRRM
regardless of whether a Member is rated at a 6 or 7. To implement this
proposal, NSCC would amend Sections I.(A)(1)(a)(iv) and I.(A)(2)(a)(iv)
of Procedure XV of the Rules.
[[Page 17931]]
II. Discussion and Commission Findings
Although the Clearing Supervision Act does not specify a standard
of review for an advance notice, the stated purpose of the Clearing
Supervision Act is instructive: to mitigate systemic risk in the
financial system and promote financial stability by, among other
things, promoting uniform risk management standards for SIFMUs and
strengthening the liquidity of SIFMUs.\16\
---------------------------------------------------------------------------
\16\ See 12 U.S.C. 5461(b).
---------------------------------------------------------------------------
Section 805(a)(2) of the Clearing Supervision Act authorizes the
Commission to prescribe regulations containing risk management
standards for the payment, clearing, and settlement activities of
designated clearing entities engaged in designated activities for which
the Commission is the supervisory agency.\17\ Section 805(b) of the
Clearing Supervision Act provides the following objectives and
principles for the Commission's risk management standards prescribed
under Section 805(a):\18\
---------------------------------------------------------------------------
\17\ 12 U.S.C. 5464(a)(2).
\18\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------
To promote robust risk management;
to promote safety and soundness;
to reduce systemic risks; and
to support the stability of the broader financial system.
Section 805(c) provides, in addition, that the Commission's risk
management standards may address such areas as risk management and
default policies and procedures, among others areas.\19\
---------------------------------------------------------------------------
\19\ 12 U.S.C. 5464(c).
---------------------------------------------------------------------------
The Commission has adopted risk management standards under Section
805(a)(2) of the Clearing Supervision Act and Section 17A of the
Exchange Act (the ``Clearing Agency Rules'').\20\ The Clearing Agency
Rules require, among other things, each covered clearing agency to
establish, implement, maintain, and enforce written policies and
procedures that are reasonably designed to meet certain minimum
requirements for its operations and risk management practices on an
ongoing basis.\21\ As such, it is appropriate for the Commission to
review advance notices against the Clearing Agency Rules and the
objectives and principles of these risk management standards as
described in Section 805(b) of the Clearing Supervision Act. As
discussed below, the Commission believes the proposal in the Advance
Notice is consistent with the objectives and principles described in
Section 805(b) of the Clearing Supervision Act,\22\ and in Rules 17Ad-
22(e)(4)(i) \23\ and (e)(6)(i) and (v) \24\ of the Clearing Agency
Rules.
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\20\ 17 CFR 240.17Ad-22. See Securities Exchange Act Release No.
68080 (October 22, 2012), 77 FR 66220 (November 2, 2012) (S7-08-11).
See also Securities Exchange Act Release No. 78961 (September 28,
2016), 81 FR 70786 (October 13, 2016) (S7-03-14) (``Covered Clearing
Agency Standards''). NSCC is a ``covered clearing agency'' as
defined in Rule 17Ad-22(a)(5).
\21\ Id.
\22\ 12 U.S.C. 5464(b).
\23\ 17 CFR 240.17Ad-22(e)(4)(i).
\24\ 17 CFR 240.17Ad-22(e)(6)(i) and (v).
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A. Consistency With Section 805(b) of the Clearing Supervision Act
For the reasons discussed immediately below, the Commission
believes that the Advance Notice is consistent with the stated
objectives and principles of Section 805(b) of the Clearing Supervision
Act.\25\ Specifically, as discussed below, the Commission believes that
the changes proposed in the Advance Notice are consistent with
promoting robust risk management, promoting safety and soundness,
reducing systemic risks, and supporting the broader financial
system.\26\
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\25\ 12 U.S.C. 5464(a)(2) and (b).
\26\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------
First, the Commission believes that the proposal is consistent with
promoting robust risk management. NSCC faces SWWR when it acts as
central counterparty to a Member with long positions in FIS. Although
NSCC's current margin methodology addresses SWWR through imposition of
the FIS Charge, it does not address SWWR associated with a jump-to-
default scenario. As described above, the proposal would address SWWR
associated with a jump-to-default scenario by using the higher
applicable Haircut Rate for all Members concerning their net unsettled
long positions in Family-Issued Securities, regardless of the Members'
CRRM rating category. As such, the proposal would address a risk not
captured currently under NSCC's margin methodology and provide for more
comprehensive risk management of NSCC's risks, consistent with the
promotion of robust risk management.
Second, the Commission believes that the proposal is consistent
with the promotion of safety and soundness at NSCC. The collection of
additional margin, by applying the higher applicable Haircut Rate in
calculating the FIS Charge for all Members, would better enable NSCC to
manage the potential losses arising out of a Member default. Holding
additional resources to address such losses would promote NSCC's safety
and soundness.
Finally, the Commission believes that the proposal is consistent
with reducing systemic risk and supporting the broader financial
system. As discussed above, NSCC proposes to collect additional margin
to collateralize exposures to SWWR associated with a jump-to-default
scenario, which could reduce the probability that NSCC would mutualize
a loss stemming from the close-out of a defaulted Member with net
unsettled long positions in Family-Issued Securities. While unavoidable
under certain circumstances, reducing the probability of loss
mutualization during periods of market stress could lessen the
transmission of financial risks arising from a Member default to non-
defaulting Members, their customers, and the broader market. Further,
NSCC maintaining additional margin could further reduce the potential
that NSCC would need to call for additional resources from Members in
times of market stress. The Commission believes, therefore, that the
proposal would be consistent with reducing systemic risk and supporting
the stability of the broader financial system. Accordingly, and for the
reasons stated above, the Commission believes the changes proposed in
the Advance Notice are consistent with Section 805(b) of the Clearing
Supervision Act.
B. Consistency With Rule 17Ad-22(e)(4)(i)
Rule 17Ad-22(e)(4)(i) under the Act requires that each covered
clearing agency establish, implement, maintain and enforce written
policies and procedures reasonably designed to effectively identify,
measure, monitor, and manage its credit exposures to participants and
those arising from its payment, clearing, and settlement processes,
including by maintaining sufficient financial resources to cover its
credit exposure to each participant fully with a high degree of
confidence.\27\
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\27\ 17 CFR 240.17Ad-22(e)(4)(i).
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As described above, NSCC is exposed to SWWR where it acts as
central counterparty for its Members' transactions in Family-Issued
Securities. Applying the same higher Haircut Rate to all Members with
net long unsettled positions in Family-Issued Securities, regardless of
their rating on the CRRM, would help further mitigate NSCC's SWWR
exposures, especially in a jump-to-default scenario. Therefore,
applying the same Haircut Rate in the FIS charge calculation is
designed to help NSCC collect sufficient financial resources to help
cover its credit exposures, with a high degree of confidence, to those
Members seeking to clear and settle transactions in Family-Issued
Securities. Therefore, the Commission believes the
[[Page 17932]]
proposed change is consistent with Rule 17Ad-22(e)(4)(i).\28\
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\28\ Id.
---------------------------------------------------------------------------
C. Consistency With Rule 17Ad-22(e)(6)(i) and (v)
Rule 17Ad-22(e)(6)(i) under the Act requires that each covered
clearing agency that provides central counterparty services establish,
implement, maintain and enforce written policies and procedures
reasonably designed to cover its credit exposures to its participants
by establishing a risk-based margin system that, at a minimum,
considers, and produces margin levels commensurate with, the risks and
particular attributes of each relevant product, portfolio, and
market.\29\ Rule 17Ad-22(e)(6)(v) under the Act requires that each
covered clearing agency that provides central counterparty services
establish, implement, maintain and enforce written policies and
procedures reasonably designed to cover its credit exposures to its
participants by establishing a risk-based margin system that, at a
minimum, uses an appropriate method for measuring credit exposure that
accounts for relevant product risk factors and portfolio effects across
products.\30\
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\29\ 17 CFR 240.17Ad-22(e)(6)(i).
\30\ 17 CFR 240.17Ad-22(e)(6)(v).
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As described above, NSCC faces SWWR in jump-to-default scenarios
where it acts as central counterparty to Member transactions in Family-
Issued Securities. This risk is present regardless of a Member's rating
on the CRRM. However, the current methodology assumes that Members with
a higher rating on the CRRM present a heightened credit risk to NSCC
and applies a higher Haircut Rate to such Members. This distinction
does not take into account the SWWR that would manifest in a jump-to-
default scenario. As such, NSCC proposes to apply the same higher
Haircut Rate to all Members. This proposal would improve NSCC's ability
to mitigate its exposure to SWWR in a jump-to-default scenario, thereby
helping NSCC to maintain a risk-based margin system that considers, and
produces margin levels commensurate with, the risks and particular
attributes of net unsettled long positions in Family-Issued Securities.
Therefore, the Commission believes that the proposal would be
consistent with Rule 17Ad-22(e)(6)(i).\31\
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\31\ 17 CFR 240.17Ad-22(e)(6)(i).
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Additionally, because the enhanced FIS Charge would be a component
of the margin that NSCC collects from its Members to help cover NSCC
credit exposure to the Members, and because the charge would be based
on different product risk factors with respect to equity and fixed-
income securities, it would be part of an appropriate method for
measuring credit exposure that accounts for relevant product risk
factors and portfolio effects across products, as described above.
Therefore, the Commission believes the proposed change is consistent
with Rule 17Ad-22(e)(6)(v).\32\
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\32\ 17 CFR 240.17Ad-22(e)(6)(v).
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III. Conclusion
It is therefore noticed, pursuant to Section 806(e)(1)(I) of the
Clearing Supervision Act, that the Commission does not object to
Advance Notice (SR-NSCC-2020-801) and that NSCC is authorized to
implement the proposal as of the date of this notice or the date of an
order by the Commission approving proposed rule change SR-NSCC-2020-
002, whichever is later.
By the Commission.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-06598 Filed 3-30-20; 8:45 am]
BILLING CODE 8011-01-P